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GasLog shares boiling over on positive news

GasLog shares boiling over on positive news
As companies look closely at their financing costs, they are quick to recognize that long term charters lead to lower financing costs. The beginning of 2014 saw a continuation of a recent trend, where shipowners in the energy business have been able to create a Master Limited Partnership (MLP), by placing ships with multi-year charters into a separate entity, structured as a partnership, and then offering “units” of the partnership to the public, or to institutional packagers of MLP investments.

Investors were not surprised, then, when GasLog announced that its board had given management a go-ahead to file a draft registration statement for an MLP. Over a year ago, GasLog had told investors that such an idea was under consideration. For the uninitiated, think of the MLP as a  mechanism with a low cost of capital that will buy vessels from the share listed company, GasLog.

Last week, the company took additional steps to build out its fleet, in advance of the partnership spinoff. Galog raised approximately $178m, in a public secondary shares offering, which, in testament to the support the company gets from investors, was “upsized”. Approximately $36.5m of the offering went to a private placement with shares going to insiders: company management and to the Onassis Foundation, which now owns 8.4% of outstanding shares.  

For a price tag of $468m, GasLog will be acquiring three 145,000 c um vessels from BG Group, which are on charters through 2020; BG Group has further options on two of the ships. In conjunction with the vessel acquisition, GasLog will be entering into a two year financing with Citibank. Presumably, this short term debt will be repaid, at least partly, with funds raised when the MLP is consummated. In a regulatory filing, it suggested that a $100m bridge loan facility (also from Citibank) would not be used, at least for now.

In its regulatory filing for the follow-on shares, the company paints a glowing picture of the LNG business. GasLog has seven 174,000 c um newbuilds on order from Samsung Heavy Industries, and options on more units that are presently the subject of a close negotiation with the yard. If options are declared, look for a change of mind on the bridge loan.

Analyst Jon Chappell, at Evercore, has been bullish on GasLog shares for a while. He put a target of $18 per share on GasLog, utilising a methodology of first computing a net asset value and then adjusting to compensate for charter levels. The long term charter coverage is important, it insulates GasLog from the vicissitudes of the short term marketplace- which is viewed as subject to short term overcapacity as vessel deliveries exceed new shipments from liquefaction facilities.

Chappell tells investors, “GasLog is well positioned for strong cash flow growth over the next few years regardless of the underlying LNG spot market…” In this case, positive sentiment more than trumped charter adjusted NAV calculation. Before the ink (mainly digital these days) was dry on the recommendation, GasLog shares surged upward- reaching a lifetime high above $20 per share, before pulling back to end the week at $19.53 per share.